Procure to Pay

UNIT 11 ACCOUNTING ENTRIES FOR P2P

PROCESS
Structure
11.0 Objectives
11.1 Introduction
11.2 Commercial and Accounting Transactions
11.2.1 A Purchase Requisition is raised by the Buyer

11.2.2 A Purchase Order is raised by the Buyer

11.2.3 Vendor Supplies the Goods/Services but does not send the Invoice
yet

11.2.4 Vendor’s Invoice is Received and Processed

11.2.5 Payment is made to the Vendor by cheque

11.2.6 The Payment is made Void because the bank could not execute the
payment Instruction

11.2.7 Invoice is Cancelled

11.2.8 Direct Debit Transactions

11.2.9 A Late Payment fee is paid to the Vendor due to delayed payment

11.2.10 Withholding Tax is deducted at source from the Vendor’s Payment

11.2.11 Some Goods are found defective and are returned to the Vendor.

11.2.12 A Cash Advance is paid to the Vendor towards part Pay ment of the
Order

11.3 Sub-Ledger to General Ledger

11.4 Month end Reporting
11.5 Let Us Sum Up
11.6 Key Words
11.7 Answers to Check Your Progress
11.8 Terminal questions

11.0 OBJECTIVES
The objectives of this unit is to familiarise the learners with:
x various commercial transactions that happen during the procure to pay process;
x how these commercial transactions translate into accounting transacions and
x the reports provided by P2P team to the GL team at the end of an accounting
period.

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 Accounting Entries
11.1 INTRODUCTION for P2P Process

As per the duality principle of accounting, for a business, the source of funds is
always equal to the use of funds. This principle is also called as the principle of
accounting equivalence.
This principle has the following implications:
x Double entry Book Keeping.
x All transactions entered into by a business have two aspects namely debit and
credit.
x Total amount debited should be equal to total amount credited.
x Both the sides of the balance sheet will always be equal i.e.
Assets = Liabilities + Capital.
A business gets its funds by:
x Increasing liability or
x Decreasing assets or
x Earning Income/Profit
It also implies that a business uses its funds by:
x Decreasing liability
x Increasing/acquiring assets
x Incurring expenses/losses
The above two situations refer to Credit and Debit respectively.
Based on the above let us look at the accounting treatment of various P2P
transactions.

11.2 COMMERCIAL AND ACCOUNTING

TRANSACTIONS
We will now look at how the commercial transactions of a P2P cycle are translated
into accounting transactions in the buyer’s account books. The Journal entries for
various stages in the P2P cycle are provided below.
11.2.1 A Purchase Requisition is raised by the Buyer
For example, the production department raises a requisition to buy raw material
specifying the quantity of raw material to be ordered (55 tons).
In this case there will be no accounting transaction recorded. Raising a purchase
requisition does not result in an accounting transaction because the PR is just a
communication from one department to another (in this case from production
department to procurement that it needs the material. Nothing of commercial value
has been transferred from one party to another yet).
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Procure to Pay 11.2.2 A Purchase Order is raised by the Buyer
Continuing the above example, the procurement department reviews the purchase
requisition and raises a purchases order (for 55 tons of raw material, costing $ 780
per ton plus taxes), gets it approved and sends to the vendor (ABC Ltd.)
In this case, there will be no accounting transaction recorded. Raising a purchase
order does not result in an accounting transaction. The purchase order is only a
communication of an intention to buy (from a buyer to a supplier). This is
considered only a commercial transaction between two parties and it does not
create any accounting transaction, yet.
11.2.3 Vendor Supplies the Goods/Services but does not send
the Invoice yet
Continuing the above example, the vendor, ABC Ltd., supplies the raw material
as per agreed terms.
In this case, an asset (Purchase account) goes up (debit) and a liability (Good
received not invoiced account) also goes up (credit). The journal entry will be
reflected as follows

Date Particulars LF Dr. Cr.

Amount Amount
Purchase/Stock 46,332
To GRNI 46,332
(Goods Received Not Invoiced)

(Note: The goods are received by the buyer at his warehouse and they are stored
away after their possession is taken over. GRNI account is a liability account
where these goods are recognised in the books of accounts since the invoice from
the vendor is not received yet and the buyer cannot recognise the amount payable
as a liability till the invoice is received.)
11.2.4 Vendor’s Invoice is Received and Processed
Continuing the above example, the invoice supplied by the vendor is processed
and approved for payment. The invoice (for $ 46332) to be paid within 30 days
from receipt (net 30).
In this case, a liability goes down (GRNI-debit) on one hand and an asset (advance)
goes down (credit) as well as a liability (payable to the vendor ABC) goes up
(credit).

Date Particulars LF Dr. Cr.

Amount Amount
GRNI 46,332
To ABC Ltd. 46,332

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When the invoice is received and processed, the goods received that were so Accounting Entries
recognised as a liability (because the invoice was not received yet), can now be for P2P Process
recognised as belonging to the buyer and in turn the liability shifts from GRNI
account to the amount payable to the vendor.
Let us look at a variation of the above transaction.
Vendor supplies the goods/services and is paid in cash.
In this case, an asset (Purchase account) goes up (debit) and another asset (cash or
bank balance) goes down.

Date Particulars LF Dr. Cr.

Amount Amount
Purchase/Stock 46,332
To Cash A/c 46,332

11.2.5 Payment is made to the Vendor by cheque

Continuing from the above example, the payments team sends the payment to the
vendor through the bank account.
In this case, an asset (bank account balance) goes down (credit) and another liability
(amount payable to vendor ABC) also goes down (debit).

Date Particulars LF Dr. Cr.

Amount Amount
ABC Ltd. 46,332
To Bank A/c 46,332

Let us look at a variation of the above transaction.

A discount is availed from the vendor due to early payment
Let us say that the payment terms were 1/10 net 30 (i.e. the customer can avail 1%
discount if the money is paid within 10 days otherwise the full amount will have
to be paid in 30 days of receipt of invoice).The customer pays on the l0th day and
avails of the discount (amounting to $463) by paying $ 45,869.
In this case, a liability (payable to ABC) goes down on one hand (debit), while
another asset ‘Bank account’ goes down (credit) and an income account (discount)
goes up (credit).

Date Particulars LF Dr. Cr.

Amount Amount
ABC Ltd. 46,332
To Bank A/c 45,869
To Discount A/c 463

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Procure to Pay 11.2.6 The payment is made void because the bank could not
execute the payment instruction
Continuing from the above example, the bank could not execute the payment
instruction as the vendor had closed the destination account. As a result the payment
needs to be made void.
In this case, the liabilty (amount payable to vendor ABC) goes up (credit) and an
asset (bank account balance) goes up again (as the money was not transferred out
of the bank account at all) (debit).

Date Particulars LF Dr. Cr.

Amount Amount
Bank A/c 46,332
To ABC Ltd. 46,332

11.2.7 Invoice is Cancelled

This transaction has two versions:
1. Invoice is cancelled with liability not created yet: For example, the buying
manager rejects the invoice (amount $ 5000) from the vendor ABC Ltd. and
asked for a fresh invoice to be submitted as there is a disagreement on the
price quoted in the invoice.
In this case, since the invoice has not been processed for payment and liability
not created for the payment, the cancellation of the invoice will not result in
any accounting transaction. Hence no accounting record is involved.
2. Invoice is cancelled with liability created: For example, the buying manager
approved the invoice but before it is paid out, he sends out a communication
rejecting the approval. In the meantime the invoice has been processed and
kept ready for payment, The buyer rejects the invoice (amount $ 5000), from
the vendor ABC Ltd. and asks for a fresh invoice to be submitted as there is
disagreement on the price quoted in the invoice
In this case, since the invoice has been processed for payment and liability
created for the payment, the cancellation of the invoice will not result in
reversal of the accounting transaction.
In case the goods have been received against the invoice, the Journal entry
will be as follows (it is a similar situation as the goods having been received
and the invoice not received yet. So we need to reverse the transaction
recorded for the invoice processing itself):

Date Particulars LF Dr. Cr.

Amount Amount
ABC Ltd. 5,000
To GRNI 5,000

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11.2.8 Direct Debit Transactions Accounting Entries
for P2P Process
For example, a vendor LMN Ltd. with whom the direct debit agreement exists,
goes to the bank with a payment demand and is paid by the bank.
In this case the cash account is credited (cash goes out) and another account called
“Cash in Transit” is debited. Cash in transit is an asset account that is used to
recognise the money that is paid but not yet accounted for.
Let us take this as a series of transactions:
1. The goods (worth $ 5000) are supplied but the invoice is not provided yet.

Date Particulars LF Dr. Cr.

Amount Amount
Purchase/Stock 5,000
To GRNI (Goods
Received Not Invoiced) 5,000

(Refer to section 11.2.3 for more explanation)

2. The vendor takes a direct debit payment from the bank

Date Particulars LF Dr. Cr.

Amount Amount
Cash-in-Transit 5,000
To Bank A/c 5,000

3. The vendor sends the invoice to the buyer and this invoice is reconciled
against the direct debit payment

Date Particulars LF Dr. Cr.

Amount Amount
GRNI 5,000
To LMN Ltd. 5,000

Date Particulars LF Dr. Cr.

Amount Amount
LMN Ltd. 5,000
To Cash-in-Transit 5,000

11.2.9 A Late Payment fee is paid to the Vendor Due to delayed

Payment
For e.g. the payment terms were that the money will be paid within 30 days of
receipt of invoice otherwise 1% per month late fee will be charged. The customer
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Procure to Pay pays on the 45th day’ and along with the late fee (0.5% for 15 days) ($ 232 on
$ 46332).
In this case, a liability (payable to ABC) goes down and an expense account goes
up on one hand (debit), while the asset (Bank A/c) goes down (credit).

Date Particulars LF Dr. Cr.

ABC Ltd. 46,332
Late payment fee A/c 232
To Bank A/c 46,564

11.2.10 Withholding Tax is deducted at Source from the

Vendor’s Payment
Instead of complete payment, withholding tax of 10% of the invoice amount should
be deducted from the amount being paid to the vendor and deposited directly on
the vendor’s behalf.
(Instead of $ 46332, the vendor is paid $41699 and the balance 4633 is deducted
as Withholding Tax.) In India, the equivalent term for with holding tax is Tax
Deducted at Source (TDS)
(Withholding tax is an amount withheld by the party making payment to another
(payee) and paid directly to the taxation authorities. The amount the payer deducts
may vary, depending on the nature of the product or service being paid for. The
payee is assessed on the gross amount, and the tax to be withheld (the withholding
tax) is computed in that assessment.
The purpose of withholding tax is to facilitate or accelerate collection, by collecting
tax from payers rather than a much greater number of payees, and by collecting
tax from payers within the jurisdiction rather than payees who may be outside the
jurisdiction.)
In this case, a liability (payable to ABC) goes down (debit) on one hand while an
asset (bank account) goes down and another liability (withholding tax) goes up
(credit).

Date Particulars LF Dr. Cr.

Amount Amount
ABC Ltd. 46,332
To Withholding tax A/c 4,633
To Bank A/c 41,699

The withholding tax is paid to the tax authorities.

In this case a liability (withholding tax) goes down (debit), and another asset
(Bank A/c) goes down (credit).

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 Accounting Entries
Date Particulars LF Dr. Cr. for P2P Process
Amount Amount
Withholding tax A/c 4,633
To Bank A/c 4,633

11.2.11 Some Goods are found Defective and are returned to

the Vendor
A debit note is also raised while returning the goods. This becomes the source
document to make a debit entry against the vendor account.
e.g. $ 4000 worth of material was found to be of inferior quality and was rejected
and returned to the vendor.
In this case, a liability (payable to the vendor) goes down (debit) while a liability
account (purchase return) goes up (credit).

Date Particulars LF Dr. Cr.

Amount Amount
Withholding tax A/c 4,633
To Bank A/c 4,633

11.2.12 A Cash Advance is paid to the Vendor towards part Payment of the
Order
Let us look at this transaction in the following three steps:
1. Along with sending the purchase order, $ 5000 is paid to ABC Ltd. as an
advance in cash payment on the order.
In this case, for the seller an asset (cash) goes down (credit) and another asset
(advance given to the supplier) goes up (debit).

Date Particulars LF Dr. Cr.

Amount Amount
Advance A/c 5,000
To Cash 5,000

2. Vendor supplies the goods/services but does not send the invoice yet.
In this case, an asset (Purchase account) goes up (debit) and a liability (Good
received not invoiced account) also goes up (credit)

Date Particulars LF Dr. Cr.

Amount Amount
Purchase/Stock 46,332
To GRNI (Goods 46,332
Received Not Invoiced)

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Procure to Pay 3. Vendor’s invoice is received and processed
Continuing the above example, the invoice supplied by the vendor is processed
and approved for payment. The invoice (for $ 46332) is to be paid within 30 days
from receipt. Net amount to be paid is $ 41332 ($ 5000 was paid as advance). In
this case, a liability goes down (GRNI-debit) on one hand and an asset (advance)
goes down (credit) as well as a liability (payable to the vendor ABC) goes up
(credit).

Date Particulars LF Dr. Cr.

Amount Amount
GRNI 46,332
To ABC Ltd. 41,332
To Advance 5,000
In an outsourced environment, the teams entering the transaction data mostly enter
it directly into ERP systems (like SAP, Oracle or JD Edwards). The ERP
applications allow the users to enter the business transactions into the systems
and automatically translate them into accounting transactions.
Let us look at how these transactions are reported after they are recorded in the
ERP.

11.3 SUB-LEDGER TO GENERAL LEDGER

The accounting transactions, as discussed above, are recorded in the subsidiary
ledgers (or sub-ledgers) and need to be transferred to General ledger for proper
reporting. This usually happens on a weekly basis and at the end of the month.
With the arrival of ERP and other accounting software this procedure has become
highly automated, however there could be some discrepancies which may need to
be reconciled after the entries are transferred from sub-ledger to general ledger.
The procedure to do that (transfer from sub-ledger to GL) is as follows:
1. All the accounting entries are generated in the sub-ledger.
2. These entries are transferred to GL.
3. The control that needs to be exercised at this point is that the entries that are
getting transferred from sub-ledger to general ledger should reconcile.
4. In the ERP, the transactions are parked in a temporary place (called interface
tables) between SL and GL.
5. The GL team is notified that the sub-ledger transactions have been posted.
The balances for various ledger accounts are also communicated so that the
GL team can reconcile these balances after the transfer is complete.
6. The GL team picks up the entries from the interface tables and posts them
into GL (this process is also automated).
The following account balances are usually reconciled:
i. Accounts Payable balance: The sub-ledger and general ledger balance
122 usually reconciles except in the following cases:
 a. If there are any revaluation entries: Any accounting entries which have Accounting Entries
been revalued due to exchange rate differences during the period may for P2P Process
give rise to discrepancies.
b. Direct entries made in GL instead of via sub-ledger: Any manual entries
directly made in the GL may not reflect in the sub-ledger and can result
in discrepancies.
c. Technical and timing issues: In the ERP, some other processes may be
running due to which entries in the GL may be delayed due to technical
reasons, which will also affect the reconciliations. The GL team needs
to fix the errors and take care of these issues while posting the balances.
ii. Cash-in-Transit balance: The discrepancies may arise due to:
a. Duplicate payments
b. Rejected payment transactions are not correctly voided
c. Non-AP payments (like bank charges, repayments of loans etc. incorrectly
posted in the AP ledger)
iii. Accrual accounts: The discrepancies arise due to aged accruals i.e. accrual
(or provision) entries from the previous periods that have not been reversed
yet. Care should be taken that the accrual entries of previous periods are
reversed in the subsequent periods.

11.4 MONTH END REPORTING

The objectives of the month end process are:
1. To close the accounting activity for a period (month)
2. To disallow any adjustment entries for prior period.
3. To disallow any back dated transactions (for prior period)
4. Close the books of accounts to prepare reports and financial statements.
In a P2P process, the month end activities consist of the following:
i. A provision/liability is created against the unprocessed invoices. This will
reflect the correct position of accounts payables. The unprocessed invoices
include the invoices that have been received and the processing has not begun
for them, the invoices that are under process. as well as those that have been
received but have been put on hold pending clarifications from the client/
vendor or any other party.
ii. A provision/liability is created against the processed invoices that have not
been paid yet. These provision details are retained for follow up and reversal
in the next month.
iii. Advance payments made against purchases are reconciled and recognized.
iv. Bank reconciliation is done on the payments made during the period. The
checks in transit are identified and cleared. The payments documents are
confirmed as void against the corresponding payment rejections.

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Procure to Pay v. The entries in the accounts of various vendors are transferred into the GL
account.
vi. Provision entries are made for the invoices expected but not received e.g.
(utility and telephone bills, rent payments etc.).
vii. Schedules related to payables are prepared for reporting (e.g. ageing report
on payables. recoverable advances and their ageing report, details on pending
payments, details of provisions made, withholding tax payable schedule etc.)

Check Your Progress

1. Which of the following is not implied by duality principle:
a. Double entry book keeping
b. Treatment of the business and its owners as separate entities
c. Assets = Liabilities + Capital
d. Amount of Debit = Amount of Credit
2. Credit indicates
a. Increase in Assets
b. Decrease in liability
c. Increase in income
d. Increase in cost
3. Debit indicates
a. Increase in liability
b. Decrease in assets
c. Increase in income
d. Increase in loss
4. State whether the following are True or False:
a. A credit purchase for $ 230, from ABC Ltd. (supplier), translates into the
following Journal entry:
Date Particulars LF Dr. Cr.
Amount Amount
ABC Ltd. 500
To Purchase 500

b. Whenever the cash goes out of the business, the cash account should be
credited.
c. GRNI is an asset account.
d. Cash-in-transit is an asset account.
e. A cash advance paid to the vendor is recognised as an asset in the books
of the buyer.
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 Accounting Entries
11.5 LET US SUM UP for P2P Process

A Business gets into a variety of commercial transactions (financial and non-

financial) with outside entities (vendors and customers) and within. Accounting
is the activity which records, classifies and summarises these transactions properly
to provide information on financial performance of the business.
Modern accounting systems work on the double entry method where each
transaction has dual aspect of source of funds (credit) and use of funds (debit).
In this unit we saw how various commercial transactions done by the business
with its vendors translate into accounting transactions.
Apart from recording individual accounting transactions in the sub-ledgers of the
account books, the AP team also needs to post these accounting transactions to
the general ledger. The balances from sub-ledgers and general ledger also need to
reconciled after this posting.
The AP team also needs to participate in the month end process. It needs to provide
reports on accruals to be made on the invoices that have been received but not
paid yet.

11.6 KEY WORDS

Accounting Equivalence Concept: (see Duality principle)
Asset: An asset is a source of current or future economic benefit for the business
e.g. cash, money receivable from the customers, land, buildings, machinery,
vehicles etc.
Cash-in-transit: This indicates an asset account in the company’s books of
accounts. It is used to indicate the money that has been paid by the company but is
not reconciled against any other liability that the company had to pay or against
an asset that the company acquired.
Credit entry: The entry which indicates source of funds i.e. a decrease in an
asset, increase in a liability or increase an income or profit.
Debit entry: The entry which indicates use of funds i.e. an increase in an asset,
decrease in a liability or increase in an expense or loss.
Double entry: The duality principle requires us to maintain accounts by making
double entries together one for credit and one or more for debit or vice versa,
where amount under credit is equal to the amount of debit.
Duality principle: The principle of accounting which states that each transaction
has two aspects i.e. source of funds (credit) and use of funds (debit) and that in
any transaction, amount of debit is equal to amount of credit. This principle is the
foundation of the double entry system of accounting.
Expense: The money spent by a business on it day to day operations.
General Ledger: The general ledger, sometimes known as the nominal ledger. is
the main accounting record of a business which uses double-entry bookkeeping.
It will usually include accounts for such items as current assets, fixed assets,
liabilities, revenue and expense items, gains and losses.
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Procure to Pay Income: The money earned by a business due to its day to day operations
Liability: It is a source of current or future economic obligations of a business
e.g. monies payable to the vendors, loans taken from lenders etc.
Month-end process: The process followed by an organisation to close the books
of accounts/financial at the end of a month. This is done to prepare reports and
financial statements at the close of month end.
Subsidiary Ledger: (Also called sub-ledger) This is the supporting ledger of
related accounts. The balance of all sub-ledgers of the same type should reconcile
with the general ledger balance.
Withholding tax: It is an amount withheld by the party making payment to another
(payee) and paid to the taxation authorities. The amount the payer deducts may
vary, depending on the nature of the product or service being paid for.

11.7 ANSWERS TO CHECK YOUR PROGRESS

1. b
2. c
3. d
4. a. False
b. True
c. False
d. True
e. True

11.8 TERMINAL QUESTIONS

Q 1. Please provide the Journal entries for the following transactions.
a. Bought goods for cash ($150)
b. Bought goods on credit from Wallace Partners ($ 400)
c. Returned goods to Wallace Partners ($ 75)
d. Paid to Mideast Utilities for services provided ($ 3200)
e. Bought a computer ($ 2,000)
f. Bought a photocopier ($ 500) from Daniels Bros. on credit.
g. Bought a machine on loan from the bank. ($ 20,000).
h. Paid advance to Kelly’s Supplies to supply stationery ($ 200)
i. Received stationery from Kelly’s Supplies against the advance received
j. Provisioned for Rent for the previous month. ($ 700)
k. Bought Cement for $ 10,000 and steel rods for $ 7,000
l. Raised a purchase order for supply of electronic components ($ 783)
126 and sent to the vendor Watsons Electronics
Q 2. Explain the principle of duality in accounting. Accounting Entries
for P2P Process
Q 3. Explain the process of posting accounting entries from sub-ledger to general
ledger? What are the accounts that mainly need to be reconciled? What are
the possible reasons that the account balances in SL and GL may not
reconcile?
Q 4. What steps does the P2P team need to take to prepare month end reports?

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